Banks: Opportunity for a Grecian Earn

IN GREECE, THE GODS ARE SMILING. the country won an upset victory in soccer's Euro 2004 championship. Starting next week, the Summer Olympics -- expected to pump &euro;6 billion to &euro;7 billion ($7.2 billion to $8.4 billion) into the economy -- are returning for the first time since the modern Games began in 1896. With the whole country on a roll, the prospects for Greek banks are especially positive.

The banking sector has benefited from heady economic growth, low interest rates and government liberalization moves last year, along with professional bank management, cost controls and a high degree of market concentration. Much of the Greek banking sector was state-owned until the government got serious about privatization in the late 1990s.

Six banks now control 80% of the market, and they don't face competition from international players or domestic mutual-style institutions. In addition, demand for loans and consumer credit remains robust, and Greek bank expansion into southeastern Europe looks set to continue.

When Greece joined the euro zone in 2000, demand for loans zoomed 32%. Last year, growth was 17%. "Greece is positioned where Spain and Portugal were some six to eight years ago," says Paul Formanko, a JPMorgan analyst in London.

Despite the growth, credit use in Greece remains low compared with other European Union countries. At the end of 2003, lending to the private sector equaled 66% of gross domestic product, compared with an EU average of 96%. Household mortgage lending was just 17% of GDP, compared with 32% for the euro zone, and consumer credit is underdeveloped at 8% of GDP against 16% for the eurozone.

"The private sector is under-leveraged compared to the rest of Europe," said Paris Manpzazras of HSBC in Athens.

That's where the banks come in.

Alpha Bank is the oldest and second-largest private-sector bank in Greece based on market share, with 19.5% of loans and 18.8% of deposits at the end of 2003. With more than &euro;30 billion in assets, the bank has completed a three-year reorientation plan -- it bought Ionian Bank in 1999 -- and moved toward household lending and credit cards. With a return on equity of 17% in 2003, the bank has about two million retail customers and more than 400 branches in Greece and the rest of the Balkan region. "They have been successfully aggressive in getting into the consumer-lending market," said Manpzazras, "and have a high level of revenue growth and minimal-cost growth."

Alpha Bank, with a market value of &euro;4.8 billion, is the official bank of the Olympic Games and one of eight short-listed to buy a stake in Serbia's state-owned Jubanaka.

Marinos Yannopoulos, the chief financial officer, says Alpha plans a big push in the domestic mortgage market, where it has increased market share to 7% from 4% in the past three years. "We expect to increase that to 15% next year," he adds.

Yannopoulos said Greece has benefited from the drop in interest rates and inflation since 1999. Annual inflation was 2.5% in February, close to historical lows. He credits the political establishment with setting aside differences of left and right to aid stability, rule of law and economic development. "That is why Greece is going forward with annual GDP growth of 4%," he said.

JPMorgan forecasts Alpha Bank earnings-per-share growth in 2004 of 34% and 10% in 2005, and at a current level of &euro;20.60, the bank's shares are trading at 12.2 times 2005 estimates. Formanko's 12-month share price target is &euro;24, and he estimates a return on net asset value of 15.5% in 2004 and 15.9% in 2005. UBS research on Alpha Bank sets a 12-month target of &euro;32 to &euro;34 based on a lower cost of equity, and a 2005 price-earnings multiple of 14 times.

EFG Eurobank, a relative newcomer to the scene, opened in 1990. But it has more than 300 branches in Greece, almost 300 in other Balkan countries, and is the third-largest bank in Greece, with more than &euro;28 billion in assets. Eurobank is focused on the retail sector, where it is No. 1 in consumer finance (28% of the market), and in the top three in terms of mortgages (12%) and retail lending (17%). The bank has the lowest cost-to-income ratio of the major Greek banks, and the highest return on equity, at 18%.

Nicholas Nanopoulos, the bank's chief executive, argues consumer lending is under-penetrated, adding: "We are offering new products and services such as co-branded, installment-credit and cash-advance cards throughout the region," he said. The bank leads the credit-card market, with 32%, followed by National Bank with 25%, then Alpha Bank and Emporiki Bank, with 9% each.

JPMorgan has a share-price target of &euro;22 on EFG Eurobank, which currently trades around &euro;17 or 12.1 times 2005 earnings estimates, based on earnings-per-share growth estimates of 39% for 2004 and 19% in 2005. Formanko estimates a return on net asset value of 20% in 2004 and 21.7% in 2005. The bank, with a market capitalization of &euro;5.5 billion, has operations in Bulgaria, Romania and the rest of the Balkans and expects to generate 20% of its profit from the region by 2008.

National Bank, the largest retail bank -- with more than 600 domestic branches and 230 in the rest of the Balkans -- has been restructuring under Takis Arapoglou, a former Citicorp banker, appointed chief executive in March 2004. Arapoglou is shoring up the bank's position in the mortgage market -- it has a 26% market share -- and "has done a good job improving their nonperforming loans," said Sophia Skourti, an analyst with Marfin Analysis, a unit of Investment Bank of Greece. "They have implemented a personnel-reduction scheme and there is further room for cost-cutting," she said. With more than &euro;50 billion in assets, National has increased retail lending and strengthened its net interest margin to 2.42% in 2003 from 2.14% in 2000. "National Bank is a restructuring play," adds HSBC's Manpzazras. "The plan is to stabilize the mortgage business and then focus on costs."

The bank's shares are currently around &euro;17, or 10.8 times JPMorgan's 2005 earnings-per-share estimates. The 12-month price target is &euro;4 based on growth estimates of 25% in 2004 and 40% in 2005. Net asset value for 2004 is estimated at 14.8% and 19.1% for 2005. National Bank has a market cap of &euro;5.7 billion and the Greek government controls 7.5% of the shares that could be sold over the next 12 months.

Bank of Piraeus is a mid-cap player, with a market cap of &euro;1.8 billion and assets of &euro;15 billion plus a return-on-equity of 11.3% in 2003. The bank has 750,000 customers, and 257 branches in Greece and the Balkans. "Piraeus has a strong operation in the north of Greece," says JPMorgan's Formanko, "and this is one of the most dynamic regions."

The bank's shares trade at 10.6 times Formanko's 2005 earnings-per-share estimates and could reach a 12-month target of &euro;12.5 based on 25% estimated EPS growth in 2005, and 30% growth in 2005. The bank has a mix of retail and small and medium-sized loan business, and looks poised to achieve return-on-equity of 15% by 2005, according to JPMorgan. Dutch financial service giant ING has a 4.2% stake in Piraeus.

Another bet on Greece is OPAP, which has the country's exclusive license for lotteries and sports betting. For the first quarter, OPAP posted sales that beat the consensus estimates by 4% at &euro;695 million and earnings before interest, taxes, depreciation and amortization of &euro;144.5 million, up 9.3% from a year earlier. There has been legal wrangling with Intralot over the introduction of greyhound and horseracing betting, but new Kino and Joker games have proven popular, and OPAP generates cash. But Stamatis Diavatidis, analyst with Marfin, said the news is already priced into the stock, currently at around &euro;14.70.

Of course, there are caveats. Economic growth could stall hurting asset quality; pension liabilities could cut profitability; and if violence in the Balkans threatens political stability, banks in the region could suffer. In addition, the country's fiscal deficit will be above 2% of GDP this year, and could hit 3% -- the limit set by the euro zone's stability pact. Investors are also eager to see the government move ahead with privatization of large state-owned companies.

Perhaps that is why Hermes is the Greek god of both thieves and money-makers.

MINING STOCKS HELPED EUROPEAN equities hold their ground Friday, despite weak profit results from Deutsche Bank and lower-than-expected U.S. GDP figures. For the week, the Dow Jones Stoxx pan-European index of 600 companies rose 1.5% to 236.4, and the DJ Euro Stoxx 50, which tracks 50 blue-chip European stocks, was up 1.7% at 2720.1.

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